A Tribute to the Thoughts of Another and his Friend"Everyone knows where we have been. Let's see where we are going!" -Another

Monday, February 13, 2012

India's Gold

Last night CBS' 60 Minutes aired a great segment on India's penchant for buying gold. I've written a few thoughts below, but first watch the segment:

Notes

First, here are a few notes I took from the video:

1.2 billion people in India. 10 million weddings each year in India. Half of the gold bought in India is jewelry for weddings. In India, a family without gold is an "incomplete family."

Indian households save about 30% of their income compared to Americans who save about 5%.

The tradition that a bride's parents will give her gold is a financial burden to some families.

Gold is so important to the lives of Indians that the poor can now get financing for it.

The World Gold Council is funded by a group of mining companies. Its representative in India created the program to help India's poor buy gold.

Q: How can you be both frugal and conservative yet be willing to spend thousands of dollars on gold?

A: When Indians buy gold, they don't think they're spending money. In their minds, that is a savings. That purchase of gold is going to your savings account. It's not an expense, it's an investment.

Indians believe the price of gold will continue rising. It is impossible to tell an Indian consumer that the price of gold will fall, because the belief that gold will continue rising is backed by its past performance.

Observations

To give you an idea of why Indians might view gold's past performance differently than we do, here are two gold charts covering the same period, 1971-2004. The first is in dollars and the second is in rupees.

Gold in India is more than just a store of value. Gold is a visible status symbol of such cultural importance that demand for it apparently exceeds net-production (savings). Some are even willing to borrow money to look like Mr. T, and the mining industry supports this.

To put this in perspective on an aggregated basis, India is importing around $34B in physical gold while running a $150B overall trade deficit. And the trade deficit is still growing, projected to reach maybe $160B this year.

The report said that at these levels, "gold imports are a huge burden on the balance of payments and accentuates the current account deficit".

[…]

According to RBI, the current account deficit is a cause of concern because of inelastic gold and oil demand, it said.

With the government increasing import and excise duties on gold and silver, both commodities are set to cost more.

Terming the current gold import as huge burden on the balance of payments, the chamber has urged the government to encourage formal financial instruments to make the investment more productive.

"India's gold imports are unsustainable and the government should encourage channelising savings in formal financial instruments to increase productive capacity of the economy," it said.

It said efforts must be made to introduce more financial saving instruments and extensive education campaigns should be undertaken - particularly in rural areas - to minimise propensity towards gold.

The report said that post offices should be used to sell such government guaranteed instruments to extend their reach throughout the country.

Being the largest importer of gold in the world, India accounts for nearly one-third of the annual demand with import bill rising from USD 4.1 billion in 2001-02 to USD 33.8 billion in 2010-11, it said.

NEW DELHI: India is facing a serious balance of trade problem, Trade Secretary Rahul Khullar said on Friday, as export figures so far in the current fiscal year have been overestimated by $9 billion.

India's trade deficit for the 2011/12 fiscal year is seen in the range of $155 billion to $160 billion, he said

Is it possible to buy too much gold?

Interesting question, huh? It seems that all the gold buying in India is contributing to a balance of payments problem, a current account deficit, and a currency overvaluation problem. No wonder they raised the import duty on gold! What's interesting about this situation is that India had a balance of payments problem back in 1991 with similar symptoms.

This is just some food for thought and discussion, but it's also quite a gold story! From Wikipedia:

By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three weeks’ worth of imports. India had to airlift its gold reserves to pledge it with International Monetary Fund (IMF) for a loan.

The crisis was caused by currency overvaluation; the current account deficit and investor confidence played significant role in the sharp exchange rate depreciation.[2] [3] [4] [5]

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having balance of payments problems. Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up and investors took their money out.

In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a slide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve Bank of India took partial action, defending the currency by expending international reserves and slowing the decline in value.However, in mid-1991, with foreign reserves nearly depleted, the Indian government permitted a sharp depreciation that took place in two steps within three days (July 1 and July 3, 1991) against major currencies.[2]

With India’s foreign exchange reserves at $1.2 billion in January 1991[7][8][9] and depleted by half by June,[9] barely enough to last for roughly 3 weeks of essential imports,[8][10] India was only weeks way from defaulting on its external balance of payment obligations.[8][9]

The caretaker government in India headed by Prime Minister Chandra Sekhar Singh's immediate response was to secure an emergency loan of $2.2 billion[11][12] from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral.[1][12] The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England[6][7] and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.[6][7][13] National sentiments were outraged and there was public outcry when it was learned that the government had pledged the country's entire gold reserves against the loan.[6][10] Interestingly, it was later revealed that the van transporting the gold to the airport broke down on route and panic followed.[1] A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber.[6] The Chandra Shekhar government had collapsed a few months after having authorized the airlift.[6] The move helped tide over the balance of payment crisis and kick-started Manmohan Singh’s economic reform process.[7]

"I have a very deep belief that Cabinet posts should be filled with politicians unless the economy is in serious meltdown, as it was in 1991, when Manmohan became finance minister," he explained.

"That was a time when nobody was going to give India any money. People forget that we had to pawn our entire gold stock. Normally when you have gold stock, the International Monetary Fund accepts that that gold stock is there, and gives you money against it. India had to physically move the gold stock out of India, abroad. I'm informed, by very, very reliable sources, that the van taking the gold to the airport broke down, and there was total panic."

Desai used this point to illustrate how far India had come economically in such a short span of time. Now, he argued, India is better prepared to handle economic downturns, even ones as severe as the current ongoing global financial crisis.

And then, of course, India bought back its 67 tonnes (and then some) from the IMF in 2009:

The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first such sale in nine years.

The transaction, equivalent to 8 percent of global annual mine production, involved daily sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said in a statement yesterday. The average price to India, the biggest consumer, was about $1,045 an ounce, an IMF official said on a conference call. Gold for immediate delivery gained 0.2 percent.

“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.”

The IMF sale accounts for almost half the 403.3 tons that the Washington-based lender in September agreed to sell as part of a plan to shore up its finances and lend at reduced rates to low-income countries. Asian nations, which have amassed stockpiles of foreign currency reserves since the 1998 financial crisis, have shown increased interest in diversifying out of U.S. assets as the dollar loses value against other currencies.

[…]

Proceeds from the sales and other IMF resources as well as individual contributors would help pay for discounted interest rates on loans to low-income countries, the IMF said in July. It plans to grant as much as $17 billion in extra loans to poor nations through 2014. The 403.3 tons the IMF agreed to sell amount to one-eighth of its stockpile.

“This transaction is an important step toward achieving the objectives of the IMF’s limited gold sales program, which are to help put the fund’s finances on a sound long-term footing and enable us to step up much-needed concession lending to the poorest countries,” IMF Managing Director Dominique Strauss- Kahn said in an e-mailed statement.

Reserve Management

The gold purchase was done as part of Reserve Bank’s foreign exchange reserves management operations, the central bank said in a statement on its Web site today.

India’s foreign-exchange reserves advanced $684 million to $285.5 billion in the week ended Oct. 23, the central bank said Oct. 30. That included foreign-currency assets of $268.3 billion, gold reserves of $10.3 billion and the special drawing rights with the IMF.

“There seems to be consensus among the central banks that it’s better to cut down on currency holdings and diversify into assets like gold, which has upside potential,” Krishna Reddy, a precious metal analyst at Way2Wealth Commodities Pvt. said in Mumbai. “The Reserve Bank of India gold purchase is a clear reflection of this belief.”

Today India has 557.7 tonnes of official gold reserves, valued at more than $30B. Before the 2009 IMF sale it had 357.7 tonnes. India's total foreign exchange reserves now stand at $296B, ranking it 9th in the world with China at #1.

A Few Thoughts

It occurs to me that Indian savers are saving at full capacity and then some; call it the savings rate ceiling. The problem is that Indians like physical gold. You don't see much paper gold at those weddings, do you?

Gold demand is generally inelastic in currency terms because its primary use is as a wealth reserve. This is in contrast to industrial metals where demand is relatively inelastic in weight terms. In other words, gold flow by volume should be observed to decline as the price rises while gold flow by value might remain steady. Yet India's gold intake has risen from $4.1B in 2002 to $33.8B in 2011. That's an 824% rise in demand in currency terms at the same time as the price of gold in dollars rose only around 600%. And this while running a trade deficit:

India's Balance of Trade since 2002

This has to be putting tremendous pressure on anyone working to delay Freegold, assuming such an effort even exists. I guess it's a good thing there are only 1.2 billion Indians.

very interesting question. The answer truly depends on how much we as the human species ascribe value to gold.

Value does not exist outside the consciousness of mankind .

It is the boundary use of a good that determines value at the margin of that good. Seems like the boundary use of gold is nearly constant (when measured in real wealth terms of course), therefore acts as an excellent wealth reserve.

In India, there's also not just one God but like a million Gods. Worshipping all these Gods while adorning these idols with gold (and other valuables) are quite commonplace in India.

Moreover, Indian families preserve gold across generations. Parents send lots of gold along with their daughters while they get married. As such -- these gold jewellery are usually never sold. It becomes a set of family ornaments which are carried over to functions (wedding, birthday etc.) for the next generation.

Humans are quite self-similar in their nature and this self-similarity of respect/value towards gold is very prevalent in India.

Interesting question, huh? It seems that all the gold buying in India is contributing to a balance of payments problem, a current account deficit, and a currency overvaluation problem. No wonder they raised the import duty on gold!

With the world financial ship sinking, it's interesting to see comments from Indian government officials hoping that they can educate the Indian people to invest in "financial assets".

An entire nation that intuitively understands the true role of gold as a store of wealth par excellence. With all that pysical gold held by strong hands, does India become the richest nation overnight with the advent of free gold?

Does buying gold and not "investing" in the markets screw up the economy?

Whose markets and what economy?

==================================

So in the early 20s, along with raising interest rates and federal budget cuts, the US began a policy of gold "sterilization" to resist the natural price mechanism—inflation—that would have otherwise acted not only as a brake on the inflow of gold all through the 20s, but also as a spur on the struggling European economy:

Federal Reserve Sterilization of Gold Flows

When a country imported gold, its central bank could sterilize the effect of the gold inflow on the monetary base by selling securities on the open market…

[...]

It is our obsessive compulsion to centrally control the price mechanism that sterilizes the vital signals that would otherwise be transmitted to billions of individual market participants keeping the monetary and physical planes connected.

[...]

In 1922, they officially changed the old gold standard into the new "gold exchange standard", which Rueff said was "a conception so peculiarly Anglo-Saxon that there still is no French expression for it." The stated purpose was "the stabilization of the general price level" which you can feel free to read as code for sterilizing the price mechanism and its elegant governance of an extremely delicate and complex balance.

[...]

In Freegold, this rising purchasing power of gold against food would have the effect of an inflow of physical gold and a spur on the economy as exports rise due to being cheaper in gold elsewhere. But here's the catch: the signals are all messed up by the $IMFS! Indonesia is already running a trade surplus. And gold is rising versus food everywhere. It doesn't matter if you're producing or consuming more in your country today, gold is still rising. In this way we can know for certain that today's price of gold is not really the true value of gold (gold priced in goods).

And that's because the price of gold today still does not reflect the physical flow of gold that would normally be a function of arbitrage, with speculators transporting gold to where its purchasing power is highest. The flow of gold today is still sterilized by the paper gold trade within the LBMA bullion banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the mines. That's a total turnover in the LBMA (sales plus purchases) of 5,400 tonnes every single day. That's the equivalent of every ounce of gold that has ever been mined in all of history changing hands in just the first three months of 2011. That's what the LBMA members, themselves, voluntarily reported. And that's a lot of paper gold that is still sterilizing the economically beneficial price mechanism that physical gold would otherwise be transmitting.

Yet things are changing, even today. That's what the rising price of gold since 2002 tells me.

The price of gold today is unstable. Anyone with eyes can see that. Worse, it's rising. Which means the flow of physical gold in the quantities needed (at today's gold price) to lubricate global trade is drying up.

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

But the flow of physical gold WILL be reestablished. The world demands it. It doesn't care how high the price goes, only that the flow is guaranteed. Only the $IMFS seems to care about how high the price goes. And, apparently, that is because the $IMFS is the main printer of paper gold. Flow WILL be credibly and sustainably reestablished, which means paper gold WILL be discredited. Flow is sustainably and infinitely guaranteed at a floating, physical-only price. What that price is in today's world is anyone's guess because we haven't had such a market in centuries."

If I understand correctly, in an environment like today where trust and confidence in the financial system is constantly getting eroded (think MF Global), holding gold is a form of withdrawing capital from the economy. Capital in modern economy is debt. Gold sitting in a private vault is also capital withdrawn from the economy.

$IMF system does not like 'deferred consumption', they want 'immediate consumption', all their misguided policies are for more consumer spending.

gold is the agent to validate one’s time preference. When there is a gold standard, gold hoarding means withdrawal of bank reserves whereby the individual forces the banks to adjust their lending rate to the rate of marginal time preference. Thus the gold standard makes the adjustment crisis-free. That is its main excellence. When off, hoarding makes the gold price soar, leading to a monetary crisis. The upshot is the same: higher interest rates.

On over-consumption of real goods aka a trade deficit and how the flow of gold at a floating, physical price will help balance out trade:

Spur and Brake

Once gold is flowing at a high enough price to balance international trade, it will start accumulating in countries that run a trade surplus excluding gold (including gold, trade will balance). Likewise, it will start disappearing from those countries running a trade deficit ex-gold (excluding gold). This is how the spur and brake forces work on an economy in Freegold.

As the gold supply within a "deficit ex-gold" nation dwindles (think: USA), each piece remaining will become more and more dear in terms of other goods and services within that zone. In other words, the purchasing power of gold will rise in the "deficit ex-gold" zone vis-à-vis goods and services in that zone. Likewise, the purchasing power of gold will begin to fall in the "surplus ex-gold" zone (think Germany or China) versus goods and services in that zone because of the large and growing accumulation of gold.

At this point the large quantity of gold in the "surplus zone" will have a lower purchasing power against goods in its own zone, but a higher purchasing power abroad in the "deficit zone" and demand for imported goods will grow while exports will start to fall. This growing demand from abroad will be felt in the "deficit zone" and will be met with new supply. Likewise, the falling demand for imports from the zone with a declining volume of gold will be felt in the "surplus zone" and be met with decreasing supply. Incrementally, the "surplus zone" will slow production and increase consumption while the "deficit zone" experiences the opposite effect. Excluding gold, the balance of trade will shift back and gold will start to flow in the other direction.

The comparison between the rupee gold graph and the dollar price graph is a nice touch. It provides a stark contrast with the US$-centric view of gold.

For the economics buffs there is a very good guest post over at ZH:

The biggest simplifying mistake in economic history was believing that a centrally planned, debt-based economy was a near-perfect substitute for a real capitalist economy, working bottom-up through unfettered price discovery, that values real production.

There is a bit of difference between the north and the south of India, when we are talking about attitudes towards gold.

The north has modernized to some extent, and the lure of gold there is quite a bit less at least in the service class than in the south.

The younger generation is also not enamored with gold, they prefer the darker shades, and diamonds :-). Lots of Indians are taking inspiration from the west.

My generation in the north has mostly gotten away from gold, but that has happened with only the next generation in the south.

In the north it is not very safe to wear gold on the streets, but in the south it is pretty safe, and people do go out loaded in gold.

I had not made any investments in gold beyond some in jewelry, which wouldn't amount to more than 10oz. But I see in the south that people routinely buy jewelry more than a few ounces. They are definitely richer than me, but the attitude is very common even in poor people. Even the maids will have some gold. They don't even like any other kind of jewelry, except gold. They even like to have utensils made of silver. Their preferred cloth is silk, which apparently has a resale value :-).

Yes the south of India is a very different place, and a gold heaven. You need to visit Bangalore and some of the gold market.

I'm a reader from India. I've been reading your blog for about two years now. I owe you a lot for sharing insights on this blog.

I never saw any merit in this culture and tradition BS about Indian love for gold. But I went from 0 to about 70% of my savings in gold after I started reading you blog. Your post explaining how gold is a focal point among available choices for store of value over time really nailed it. On a visit to Zaveri bazar in Mumbai to buy some coins, I noticed how a spectrum of religions, languages, nationalities, converged on gold. It seemed as natural eating, sleeping and other "needs". That put the focal point concept into perspective like never before. Perhaps that is obvious to many Indians given the diversity here. You can't miss it.

Culture and tradition push people into doing what they hope will work in their favor. Perhaps well meaning philosophers and thinkers among every tribe thought things through, before instituting such cultural practices for the benefit of future generations. Add a little religious spin and it works like a charm.

In contrast well meaning wise men of this day and age, however, would be happy if all of us saved in US government paper. The American in the video clearly reflects the effect of such post-Roosevelt-gold-confiscation or post-1971-Nixon-closing-the-gold-window or whenever it really started "cultural" anti-gold brainwashing.

So my point is that independent rational thought trumps culture and tradtion, though it depends on one's ability to think. And to really visualize and grasp an abstract idea such as this needs several supporting concepts. Hats off to you for your effort to enable people to understand the true value of gold.

I'd be pleasantly surprised to find anyone in India who sees gold the way it's understood by most readers of this blog. But as you rightly pointed out, it's great to have 1.2 billion people culturally aligned with Freegold!

KVT

PS: Here's something you might find interesting, esp. in the Indian gold context:

nice that you picked up my comment regarding your last Superorganism-Post:Because of that I especially reread your "How is it different" post (which is actually pretty thin, but okay). As I wrote last time: In India it appears to be already Freegold-Valhalla.Now rereading the "Superorganism" posts, I really wonder:How does anybody in India profits from the Freegold-Valhalla on the PHYSICAL plane? Or in terms of entrepreneurship? Or in whatever?I mean we hear all the time how "great" the freegold mechanism is in contrast to the IMF mechanism.We now have here an example, but you completely miss to point out the advantages for the PHYSICAL PLANE's BENEFIT.

That would be interesting, because I have quite some difficulties to spot those in Freegold-Valhalla (aka India).Thanks & regards, AD

with the size, for those considerations I guess India can be considered more its own Freegold-Valhalla microcosm.About those trade deficits pointed out, looking at the total amount private/CB gold holdings, those are peanuts and do not change anything about the overall picture.

About the "free" in freegold? Well, you tell me. At least I can tell you that my (free)gold is basically as free as the one of indians, not for sale unless for absolute necessary spendings, it's for saving regardless of price, since I am not so desperated to wait for a 20-bagger, probably just like indians.

You wrote:"with the size, for those considerations I guess India can be considered more its own Freegold-Valhalla microcosm"

India cannot be considered it's own Freegold-Valhalla. The reason is the answer to the next question:

"About the "free" in freegold? Well, you tell me."

The "Free" in Freegold is referring to the fact that gold will be free of the shackles of the paper gold market.

The "Free" refers to the fact that gold will be priced on a physical-only basis, unencumbered by fractional reserve bullion banking practices.

India does not price its gold using a physical-only price, unencumbered by paper-gold contract supply.

I am not surprised that you can't grasp the discussions on this blog about the derivative concepts spawned from the Freegold concept, such as the structure of the euro, which anticipates this future monetary structure; you have failed to grasp even the most basic concepts.

Your comment about the trade deficits (unsurprisingly) fails to take into account the effect of a transition to a Freegold structure, with regard to impact in value and direction (surplus/deficit) of the balance of trade.

Looking at the Freegold-Valhalla microcosm (aka India):1.) In India gold is priced in physical only, CHECK2.) When people want to "save" they tend to save in gold physical only, CHECK

What you are doing, considering talking levering around outside of that microcosm about the $/IMFS-price of gold, does not matter to the microcosm in its inside, if the microcosm is big and independing enough. 2.1% imports and 3.1% exports compared to overall GDP, I say neglectable on the microcosm (besides, not really that micro: 1/6 of earth population).

What is noteworthy, is your tone: "you can't grasp...", somebody pissed about the facts?

Anand,from your post I assume, that you are contrarian to my view that India is a freegold microcosm.

Okay, since "I dont get it", let me rephrase this to another question:Let's assume that the whole world shifts over to the "freegold" mechanism, like proclaimed here on the blog.What does change in India on the PHYSICAL plane, which was prevented to happen before?Greets, AD

AD is trying to understand/test the concept of Freegold without reading, having people here explaining it to him under different angles, and trying to see if he can catch some contradictions. He is just a lazy attention seeker disruptive troll, if ignored, he will free the board for more constructive activities.

Oh, really? Does it bother people so much to take different views? Especially since we have now really interesting posts in combination: "How is it different", "Life On the Ant Farm", "Superorganism", "India's Gold".And in that you call my posts "disruptive"? You prefer to read the dumb Copy&Paste responses stuff the one-hundreth-time again?

"In India, it always was and still is, much more than just a precious metal. It is part of the fabric of our culture and an inseparable part of our belief system. It is the essence from which the universe was created. In a dark and lifeless universe, the Creator deposited a seed in the waters he had made from his own body. The seed became a golden egg, bright and radiant as the sun. From this cosmic egg of gold was born the incarnation of the Creator Himself - Brahma. From the root word Hri meaning imperishable, comes Hiranya, the ancient name for gold. Brahma is referred to as Hiranyagarbha - the one born of gold"(1).

...Gold has always been considered a sacred item in the Hindu way of life and is a must in every religious function, the explanation being that gold is pure having passed through fire in its process of evolution."(2). Over centuries and millennia, gold has become an inseparable part of the Indian society and fused into the psyche of an Indian. Indians see the metal as a symbol of purity, prosperity and good fortune."

Guys, I am supporting AD here. I think he was just trying to say that India seems to be quite a long way along the Freegold path already.They save in Gold whatever the $imf price is even at the expense of a trade deficit in $imf terms. They accumulate Gold and get rid of $imf.I thought that this 'flow of Gold' iswhat Freegold is all about. Not so?

I hope for the people of india that they will not become a "rentier state". Have you read the history of Nauru?Interestingly this leads us to Greece: They where also great in exporting monetary tokens, not gold, but Euro-debts. In the end it actually didnt really matter, will be wiped out, once you destroy the physical plane, it does not matter what your monetary plane was about: paper, gold or guano.Greets, AD

Remember the reason why gold would be revalued upwards: because it would break the shackles of the paper gold market. Gold options are only worth something as long as paper gold trades. No paper gold --> options are worthless.

Only physical, unencumbered, unambiguously-owned gold will be revalued.

"It's not just gasoline consumption that's declining--petroleum and electricity consumption are also dropping. Is that indicative of economic growth?

[...]

The basic thesis here is that petroleum consumption is a key proxy of economic activity. In periods of economic expansion, energy consumption rises. In periods of contraction, consumption levels off or declines."

Hi Michael H,Thanks for the comment. I agree with your thoughts on paper gold and derivatives which will presumably be settled by diktat at a low price during the early stages of the 'transition' to Freegold @ 55,000$/oz.This is in fact why I asked for suggestions on the best way to play this potential trade of several lifetimes!My current thinking is to find a counter-party that a/ has physical b/ thinks that all goldbugs are nuts c/ has never heard of Freegold.Perhaps we can arrange a private contract with these guys with settlement in physical, which I think I mentioned earlier.Possibly a BB or a gold producer?Are there any other suggestions?clearly, we need to avoid Comex andother traditional paper markets.Look forward to comments. Anyone?

My comment was more in the spirit of FOFOA's spur/brake concept re-posted by JR.

India is consuming more than they are producing so that can lead to imbalances, which seems to be the case with FOFOA's comment:

"It seems that all the gold buying in India is contributing to a balance of payments problem, a current account deficit, and a currency overvaluation problem. No wonder they raised the import duty on gold!"

You said "How does the markets India determine at what price to sell and buy gold?"

Who cares? I guess they work off the Comex close or something. Surely the point is that the Indian people are already using gold as a SOV in large amounts which is getting towards the Freegold endgame that FOFOA alluded to in his Gold in India article. This is in stark contrast to the West wherethe premier SOV is government bonds.

If we take the combined purchases of gold as a SOV by India and Chinawe get approx. 50% of the annual global new supply. No wonder TPTBare terrified that this trend perhaps spreads to the West."Bring it on", I say.

A private contract (not on an exchange) where we pay them for anoption on PHYSICAL GOLD at a definedstrike price for a defined period of time.If they don't deliver physical then they have defaulted on the contract.

"This is where I have written in the past on this blog that if the potential windfall is big enough, I wouldn't even trust my own sister with such a temptation, let alone a stranger, a corporation, a bank or a government operation."

"if you take the time to really understand Freegold-RPG, what I write about here, you'll know that getting there consists of three phases: a stasis followed by a punctuation followed by a new stasis. And it is during the punctuation phase or "transition" that I believe we will have a brief period of "peak risk". What risk, you ask? Well, it is the risk that your expected transition gain will be taken (or simply kept) by someone else, and you'll be cashed out at the official, legal price of gold; a price at which no physical can be found at that time. I'm not going to say much more about it here. But as ANOTHER would say, think long and hard on this

[...]

When gold is finally revalued, it will happen in the dark. You won't be able to see it happening on your ticker. And the de facto transfer of wealth that will occur will only flow to specific ounces of physical gold, not to ambiguous claims on some amorphous thing called gold. Ambiguity leads to more people thinking they have exposure to the revaluation than the amount of value there will be to go around. It also leads to the potential for the abuse of claims, since for a brief time the price backed by the legal system may be very different than the value of the actual physical in custody.

[...]

In this game of musical chairs, unambiguous, discrete pieces of physical gold are the chairs. Do you have your chair? Or do you own a claim ticket good for a portion of a chair? How will the newly revealed value be distributed? Will those that could potentially keep it for themselves hand over your fair share?

[...]

Again, what do you have? Do you have your chair, or do you have a claim check that's supposedly good for a chair?"

"You said "How does the markets India determine at what price to sell and buy gold?"

Who cares?"

You should care, as it is the same pricing mechanism that prices YOUR gold.

"Perhaps we can arrange a private contract with these guys with settlement in physical..."

Who is the "we" you are referring to?

Have you read the ANOTHER/FOA archives? I highly suggest you do. Here are some snippets:

FOA: The gold market is made up of a very broad spectrum of investors. At the very farthest ends of this spectrum lie the persons with the largest influence on the physical bullion. The super wealthy at one end and the "third world no ones" at the other. The middle is occupied, mostly, by the "investors with western thought". The far ends buy bullion. And they don't buy it as a gamble or a game! It is a way of life that has worked, through thick and thin, even before the West was "The West".

Now, on the other hand, this "modern day middle of the spectrum"! Well, they have read why we need gold, but they have never "Experienced" the need for gold! Until that day, when they gain "Experience", most of them will make "A Gamble That They Never Intended To Take". Yes, they do invest in all forms of paper and or leveraged gold and all the while, expounding from the roof tops the coming currency crashes and stock market declines. Even looking for bank closures and bank runs, as they cling dearly to comex options and gold stocks.

...

FOA: This modern paper market is relatively a new concept in world gold trade. It was created by banks, western traders and mine operators themselves over the last 15+ years. They supported this market by buying into it instead of buying and trading only real gold. True, the paper promoters may have been dishonest in presenting the effects of this process, but no one was forced to use it! Without user cash flow giving credibility to these paper derivatives, the market would not exist in it's present form. Yes, it's true that the Euroland and dollar faction agenda, along with oil interest and indeed physical gold traders all benefited from this investors market making cash flow! But this is reality for any investment where a buyer of a contract abrogates the security of present real ownership into a paper position with counterparties risk. Even today, call option buyers give their money away in support of this illusion, instead of buying coins outright. Truly, western gold paper traders and gold stock investors today a have evolved and in no way represent what the term "gold bug" used to mean. Today, physical gold advocates are the real gold bugs as they now posses the real leverage paper players only think they have!

FOA: The real leverage today is found in the understanding of just how this current "wind down" of official policy will impact the two markets for gold.

...

FOA: It all comes down to you playing with a paper gold supply that's supposed to represent gold you could conceivably get, if needed. But the closer we get to the "real act" in this play, the more the paper game is inflated with supply that cannot be covered outside a cash settlement. That is a simple position to understand and work from but just look around? The "Western Mind" is stumbling all over itself in an attempt to explain it with a different outcome. In other words: There must be a way this can all work out so as to preserve our dollar and the leverage we own in these paper gold substitutes. You see, it's the perceived leverage in paper games that keep them coming back, but official policy has changed these markets in order to conduct a now ongoing currency war! Paper gold leverage is only an illusion built on the desires of dollar players trying to prosper in a dollar position. Well, I can tell you that the further we travel this trail, the higher the eventual cash settlement of all gold paper will be and the less that settlement will be allowed to match any "free physical" price.

This, my friends is the reason so many Physical Gold Advocates have no intention of selling their physical gold for dollars any time soon. "They don't expect the dollar to retain enough real value to warrant trading it for gold. At any price! When the "real act" begins to play out, international gold will be settled outside the dollar world and done so far above the coming forced contract cash settlement prices. Whether traded "outright" or for a "better" currency, gold and the current dollar derivative world will part ways.

By holding physical gold you are owning a super leveraged "derivative" that will be exchangeable against the value of real things at a par level lost to the minds of most investors. Today, physical gold purchased in dollar values is discounting it's worth by perhaps 100 times. For us PGAs, that is a leverage worth "playing the physical game for"! (smile)

By holding physical gold you are owning a super leveraged "derivative" that will be exchangeable against the value of real things at a par level lost to the minds of most investors. Today, physical gold purchased in dollar values is discounting its worth by perhaps 100 times. For us PGAs (physical gold advocates), that is a leverage worth "playing the physical game for"! (smile)

… Throw in the fact that the earth will not give up all its gold any time soon, present world gold holdings in reserve currency today must rise in value at least 100 times to match what assets now exist. On top of that add in the fact that dollar gold will go sky high just to equal past dollar creation (as the dollar fails) and one can see where physical gold is "the play" in modern times. Forget stocks, business valuations, land or currencies: physical gold is the wealth for the next generation.

Friend of Another (10/11/98;) You know, LTCM was a well connected group that many others emulated for the very reason that they were, well connected. Now, it first appeared that these gentlemen were reprimanded with lower US rates because they acted so boldly. In some quiet circles it is still seen this way. But the speed of the event makes me think that the Hedge funds positions were correct as was the information they acted on. Was some leverage applied to Mr. Greenspan and Mr.Yen toforce a quick resolution of their problem? Perhaps a problem of larger scope and importance was seen over the horizon?

This I do know. To cover the open gold positions will require far more than simple option strategies as loss hedges! We may enter a pricing storm for gold that will see it's value literally all over the map! The possibility of the large up and down moves may wreck many portfolios that have strayed from the simple action of buying plain physical bullion, without leverage...

As seen in the LTCM debacle, a little money in the right hands can bemultiplied into billions of new found liquidity. Now consider that some have stated that the gold loan contracts amount to 8,000 tonnes or more! Another has said that they, if actually closed out as gold deliveries would amount to over 14,000 tonnes! Suddenly we see where the money has come from to gun the world asset markets. A market of trillions!

With the leasing market expanding, along with stock, bond, derivatives andcurrencies markets, financial operators jumped into the game (LTCM) mostly becausethey read it wrong. These people (Andy Smith??) are the ones that helped send the goldmarket much lower than it's original simple purpose intended. No entity was everdumping enough gold onto the market to drive it that low (below $320??). The leveragepaper boys had figured out the game and were exploiting it.

Thanks a lot for the comments and quotes. I guess I should forget it all.I keep having this dream in which a large amoured truck with guards arrives at my private vault with pallets of gold bars from well known slimeballs like JPM and The Squid tosatisfy my option contract after the transition to Freegold.Oh dear! Will have to find something else to dream about.I was trying to find a way to screw THEM !Thanks anyway.

"With the leasing market expanding, along with stock, bond, derivatives andcurrencies markets, financial operators jumped into the game (LTCM) mostly becausethey read it wrong. These people (Andy Smith??) are the ones that helped send the goldmarket much lower than it's original simple purpose intended. No entity was everdumping enough gold onto the market to drive it that low (below $320??). The leveragepaper boys had figured out the game and were exploiting it. "

==================================

Date: Fri Dec 12 1997 21:06 ANOTHER (THOUGHTS!) ID#60253:

Oil is only priced in US$ worldwide. Gold is only priced in US$ worldwide. It is important that this process of dollar backing continue, as it is the only thing keeping this "digital currency" alive! It is also important that all other currencies seek the US$ for backing, as they would not survive on their own. Why would not these countries just hold oil or gold for backing? Because oil is not buried in their back yard and real gold would bankrupt them in a minute. You see, a country can buy all the paper gold they want as that gold remains on deposit at the BIS controlled CBs. But, if they try to buy real gold outside the LBMA system the price would explode and the BIS would not come to rescue their currency. All real bullion outside the system must remain available at production cost prices ( in US$ ) for the cross trading of oil thru the LBMA. There are only two threats to the world fiat currency system at present. The oil states could stop buying US$ for oil and drop all paper gold for real bullion. Or, the masses could buy up all the physical supplies thereby breaking the OIL/GOLD/US$ bond.

The paper gold market controlled by the BIS/LBMA system is, alone equal to more than all the gold in existence. This market works like a hybrid currency using approximately twenty to forty percent of all CB gold in leased form as backing. The paper behind the lease is a form of CB/gold and is used as a "fractional reserve" that has built this huge market. This system has worked and does work well. You have but to look at the good value that is received when dollar debt ( digital currency ) is purchased with oil. The world works! But this system cannot continue. There is a limit to how far gold can be inflated in quantity using "fractional reserve leasing" as backing. The fatal flaw was found in the "forward sales" of unmined gold. The whole system counted on the expansion of cheap mining techniques to supply much more gold at a cheaper price far into the future. This happened to a degree for a few years but then just leveled off.

Now the LBMA continues to flood the market with paper gold as if nothing has changed! But it has, we reached production cost! That wasn't suppose to happen until the mining industry had raised supply many times what it is today.

On the question of whether India already benefits from its 'free gold' attitude - well it is a very gold friendly attitude, but they still get their gold from the mines at the low price London price.

I'd like to turn around the question. In which way do the US and UK suffer from their anti-free gold attitude?

The answer is in the real economy. The problem is that their currencies trade at artificially (and unsustainably) high values. This makes it very easy to import not only resources (that's probably why they are doing it), but also to import other products. As a consequence, their economies have changed over the decades, from production to consumption (this is called 'services' in new-speak), and they have lost their industry.

The problem is that when their currencies eventually devalue, this will happen way more quickly than they can benefit from their newly competitive exports in order to rebuild their industry. They will suddenly be poor and without industry at the same time.

On other words, the problem is misallocation of capital on an absolutely huge and unprecendented scale.

Who has suffered? Definitely the US and the UK. But even with traditional exporters such as Japan and China, I am not sure whether they will come out alright at the other end. Just from the numbers, Germany looks quite strong. It seems they have retained their industry and although they have similar demographics to Japan (although less seriously perhaps), they seem to be able to keep their shop running.

I don't know enough about India to say how their real economy is doing. Although the huge gold imports may result in a lot of foreign held debt, it need not be damaging to their real economy as of today. Their problem might start after the transition when they realize their new windfall wealth and go on a spending spree.

It is also interesting to compare Japan and Germany. Perhaps the Japanese problem is that they have their own currency.

You can get a little uppity and ideologically self-righteous and consider it an act of agroist self-expression.

Or you can more fundamentally recognize that when you deploy your savings in the system (the $IMFS' debt) you enable systemic malinvestment. But when you withdraw savings, you don't :)

those who net-produce and then funnel their savings into those antiquated financial instruments have and will always make somewhere between a much lesser and a massively negative contribution to society than the gold hoarders. I say massively negative because it is they, Dagen and Munger, that enable systemic malinvestment and incentivize the kind of lowering of prudent lending standards that almost brought the system down in 2008. By contrast, gold savers force banks to use their own capital when funding the debt-based consumption of the widgets left on the table. Paper investments pinched off by the sphincter that is Wall Street only encourage and enable banks to make too many loans, far beyond the weight (and prudence) of their capital.

So Munger and the Dingbat are wrong wrong wrong! You're a jerk if you save in paper, enabling the destruction of Western Civilization. Rational people everywhere have a moral obligation to buy ONLY physical gold with their savings. If you're capable of understanding the REAL world, you have a moral obligation to become rational.

As ephemeral_reality alluded to above, when you withdraw your savings for the system, when you eschew holding credit, its a vote against the currency economy:

Our money is credit. “The people’s” money has always been credit. Credit expands and contracts based on the availability of actual money, the monetary base. 1922 was the first time they included a form of credit as the base itself. A Pandora’s box if ever there was one!

But don't assume there is coercion involved when I say credit is our money. It is the best possible money for a vibrant economy. It is how the pure concept of money emerged in the very beginning. When gold first became money, it was as the mental unit of account. I'll give you five ounces of gold worth of cattle and you'll owe me five ounces worth of milk and other goods and services. When we participate in a vibrant economy, we deal in credit denominated in money. When we withdraw from a mismanaged economy, we withdraw into the monetary base, we hoard the reserves. Holding credit is our vote for vibrancy. Hoarding reserves is our vote against the current economy.

Gold is in the process of changing functions in the global economy. And in this transition, "the most visible transformation since it was first used as money," it will plateau at a new, mind-blowing level before it resumes its proper function. This is happening. It must happen, because bullion bank paper promises cannot function like gold.

This LTCM, they stand in the open for all to see. This "Noble House" holds no resources above or below the ground and many now ask "how this palace of paper could stand"? To this I add "how will they deliver the real items they owe"?

Regarding jojo's "santa" post earlier. I saw this post on Jim Sinclair's site (www.jsmineset.com). He's recently made some posts that sound a lot like Freegold. But there's enough of a spin on it to leave me wondering if it's two sides of the same coin or two different possible outcomes to the $IMFS endgame we're in. Any thoughts? I think I get the big picture but the devil is always in the details.

We've seen Santa bring up this concept lots of times now.I see his theory as "Freegold with redundant virtual currency attached".Maybe that's too simple a view, but I'm quite sure FOFOA would agree that this extra virtual layer is completely unnecessary.

Even though the extra virtual layer doesn't really have a function, perhaps TPTB will go for it anyway, just to keep the illusion going that they are providing something useful to the people.Who knows? Not me :P

There's only one way to beat the Giants to the gold, and that is to run in front of them. Jim ended his interview by saying, "Take care of yourselves, because nobody else is gonna do it for you. Have what you own, otherwise you don't own it." What a great interview!

But, unfortunately, Jim also subscribes to the hard money camp CB/fiat thesis. And with this view, he comes across as colorblind to the difference between the ECB and the Fed/BOE, the difference between the euro and the dollar, the difference between a gold standard and Freegold, and the future system that is already unfolding. The problem with his view is that, while it does deliver solid individual advice, it leads to poor macro conclusions and predictions.

For example, Jim and I both agree that the $IMFS is kicking the can down a dead end road. The system is basically dead already, and the MF Global bankruptcy case may very well turn out to be the last nail in the confidence coffin. But he concludes that this obviously means a return to a commodity currency based on historically similar occurrences.

Like others in the hard money camp, he envisions this reversion to a commodity base being crafted by some of the same people running the failed current system through a revision of the unit of account function at the super-sovereign level. Jim says, "When things become extraordinarily difficult, you'll find that any attachment to gold, even if it's via a virtual reserve currency, and a global Western-world M3 for valuation, it will be considered to be a solution and probably will be a road out."

Latest 3Mo T-bill Auction results saw nominal Yield still rising now at 0.95ish and representing an "Investment" of $997.59 to get back $1000 in 3 months.Bid-to-cover Ratio uber-healthy @ mid 4's.Market still reminiscent IMHO of Paramedics feverishly working on a Dead Corpse.

Finally some general comment on FOFOA's blog. There is a huge amount of material here, and so any newcomer who discovers this blog for the first time, will have to find out where to start reading, and it will take him to read several articles before he is able to connect the dots. Miss a key article and you end up with a gap and just find some things very strange, but still not be able to locate that gap.

How about a 'Quick Guide to FOFOA', some 1-3 page overview that contains links to, say, 5-10 FOFOA articles with a quick description of their content and a suggested order of approaching them. Does such a thing exist? Is perhaps someone working on it? JR? If there is one, FOFOA, would you in general be interested and perhaps endorse it (only if it is good, of course) and make it 'official', perhaps post it as an introductory page?

"Virtual reserve currency" means something—like the SDR—that's primarily a unit of account for the purpose of providing monetary stability. But with the primary and secondary media of exchange becoming separate but symbiotic counterparts, stability will be automatically achieved, and a "commodity-based" super-sovereign unit of account comparing fiat M3 with a centrally managed gold price will be completely superfluous and unnecessary (i.e., as unused as the SDR).

Jim Sinclair: "You can fix a market, but wait 'til you see what you have to do to fix a whole system."

Eric King: "One final question, Jim. We've talked about gold being revalued. When that day comes, and there is a gold-backed currency once again, will the world be able to turn itself around here?"

This is two people discussing a possible solution to a serious problem at the 11th hour. What they don't understand is that this very scenario—$IMFS collapse—was faced 32 years ago and a solution was crafted at the highest levels. That solution took 20 years to launch (at great cost, mind you) and today it stands at the ready. If you read too much ZH and thereby think the European debt crisis changes things in some way, guess again. The European debt crisis is a symptom of the dying $IMFS, not the Eurosystem. In every way this is true.

Jim talks about the sociopathic bond vigilantes (a relic of the $IMFS) who can take entire countries down through the debt markets. He talks about them waging WWIII in the bond markets every day. If you want stability, insulated from these sociopathic traders, you don't want some slipshod unit of account basket solution patched together by the IMF at the 11th hour. You're more likely to fall back on the long-line plan that took two decades to implement and another decade to season.

The Achilles' heel of the $IMFS is that debt is the system's official store of value and foreign exchange reserve. And bearing this flaw, savers, currencies, banks, governments and even entire countries are all vulnerable to the inevitable failure of the debt.

The problem with debt performing these functions is that debt is a derivative of the currency itself. Currency moves opposite the flow of real goods and services. And with a derivative of the currency acting as the only counterbalance to uneven trade, there emerges the exact opposite of a natural adjustment mechanism for correcting trade imbalances.

With debt as the store of value and official reserve asset, the party producing more real goods has no way to record his net production (savings) other than lending that excess currency back to the consuming party, encouraging him to consume more, and recording the new debt. A true adjustment mechanism makes the balance swing back and forth. But the debt system requires an infinite debtor. So the system is designed to fail. The debt backing the system is designed to fail. And as the official store of value and reserve asset, the savers, currencies, banks, governments and even entire countries are destined to fail in the end… under the $IMFS.

====================

See what burningfiat wrote above:

I see his theory as "Freegold with redundant virtual currency attached".Maybe that's too simple a view, but I'm quite sure FOFOA would agree that this extra virtual layer is completely unnecessary

If Indians withdrawing credit from the system is creating a headache for the Indian economy, does the government sponsored gold/silver purchases by chinese people support the chinese economy, by withdrawing credit?

The flow of physical into a trade deficit nation like India is only possible through the sterilization of gold flow via the paper market. And the bigger the flow into India, the more stress on the sterilizers.

This has to be putting tremendous pressure on anyone working to delay Freegold, assuming such an effort even exists. I guess it's a good thing there are only 1.2 billion Indians.

=================================

Under the $IMFS, gold flow has the opposite effect it should - gold imports are a huge burden on India's balance of payments and accentuate the current account deficit. India needs more balanced trade - the recurring currency crisis concern is that it has a big trade deficit the rupee has been financing and might it be overvalued and collapse again?

The main issue for the rupee has been the financing of its external obligations, including the trade deficit, said Daniel Hui, senior foreign exchange strategist at HSBC in Hong Kong.

[...]

Foreign institutional investors bought about $3 billion of Indian debt and moved $854 million into shares since the new year began, data from the market regulator showed on Wednesday.

[...]

A trade gap Khullar said may reach $160 billion in the current financial year threatens to revive pressure on the rupee after it tumbled the most in Asia last year.

[...]

1991 India economic crisis

By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three weeks’ worth of imports. India had to airlift its gold reserves to pledge it with International Monetary Fund (IMF) for a loan.

The crisis was caused by currency overvaluation; the current account deficit and investor confidence played significant role in the sharp exchange rate depreciation.

I like the idea of a FOFOA quick intro. I've written a few for friends - usually customised at their personal view after a verbal discussion.

How about a wiki format? Similar to how FOFOA has 'refined my best advice for buying gold over the last few years' we can refine the advice over time from various contributors.

The only problem with the Wiki is that they typically expose IP Addresses in the history and for good reason people might be shy of that.

Another random thought I have been having is that this comment format on blogger is very cumbersome for these discussions. A proper forum engine would be a lot nicer where separate threads could run on different topics.Just an idea. It would be up to our host of course.

* one for classic goldbugs and hard money figures* one for economists* one for investment advisers* one for the average person on the street* one for deflationists* one for inflationists* one for Euro haters* ...

The blogger comments are definitely painful to follow and a total failure if you try to retrieve old discussions. A forum software would certainly be much better. But then, we don't want to divert FOFOAs traffic from this precious blog. So it is FOFOA's choice. If you google 'free forum hosting' - there seem to be a number of alternatives.

If you have a forum software in which you can edit your own postings, the wiki might be unnecessary after all.

FOFOA raises interesting questions that are well worth pondering! As we know, silver will never be completely "free" because of its important industrial role. The problem is that under the current system gold is also not "free" to act in its savings role. India seems to understand the true role of gold. Once we throw off the shackles of the Western view of gold as a trading vehicle, it's tempting to see those saving gold as enlightened. And yet, as FOFOA points out, "Gold in India is more than just a store of value"! It has a hugely important cultural role in dowries etc, to the extent that "Some are even willing to borrow money to look like Mr. T". In a Freegold environment, would it make sense to borrow money to buy gold? The problem may be misallocation of capital in the UK/US but perhaps there is a problem of misallocation of savings in India.

Despite this reservation, I expect most Indians were well satisfied with the performance of their gold during the 1991 rupee depreciations! And the government’s gold reserves do appear to have "worked" correctly, flowing out of the country with the balance of payments, forcing the government to reign in spending and improve the balance of payments until they were able to buy gold again.

As a side-note, a recent article proves that it’s not just Indians in India who buy and store gold. There is a huge Indian population in the UK and they haven’t changed their habits. Unfortunately, as the article shows, others are realising the value of their gold, which makes me wonder if it will retain its jewellery/fashion role to such an extent (or weight anyway), once it revalues!

PS: although perhaps not exactly what you had in mind, there are several introductory "summaries of Freegold" of various kinds in the side-bar, (including my own "aide-memoire"), kindly linked to by FOFOA.

Sean said "Unfortunately, as the article shows, others are realising the value of their gold, which makes me wonder if it will retain its jewellery/fashion role to such an extent (or weight anyway), once it revalues!"

You are right. I tell my wife. All Gold in Indian women's neck will come down when Gold revalues up.But it was that way 90 years ago.

The generation of my grandmother (age 93) were only able to buy a small chain/earing then, unlike past 40 years.

this is actually an interesting question: silver will never be completely "free"

How about wheat? I am quite sure (unless someone shows me a really convincing argument) that wheat is free. By this I mean that there exists no "paper wheat" in the banking system, i.e. nobody has account balances in wheat that are written against a fractional reserve. Copper and iron ore are probably also free - although some market maker might fractionally reserve the stock that backs their position in the futures market. In any case, this is probably not a factor of 20 as we have estimated for gold.

In this sense, silver could very well be free one day. Remember: So far, silver is traded precisely in the same fashion as gold. But copper, iron ore and wheat are not. If silver is just a consumable, then why is this?

To my mind, demand drives everything. You can offer a supply (a list of posts), but until the internal demand grows on its own, the supply will do no good. Individual demand finds its own supply in my experience. My supply offering is the entire blog, and I'd prefer it if you'd consume A/FOA three or four times first, but that's just me. Matrix Sentry recently asked me for my "recommended" list and here was my reply:

I actually don't like to put out my own list of recommended posts. From my vantage point, I can see that different people respond differently to different posts. So I try to write different kinds of posts so that everyone is covered. But I'd have to do an impossible psychological evaluation on a person in order to pick out the posts that would most speak to her.

You've probably noticed that you like some of my posts better than other ones. Well, I can assure you that there are equally intelligent people out there who especially liked the ones that you thought were just okay, and disliked the ones you loved. I can see this strange divergence even between the likes of JR, Costata and Blondie.

So I just let others like JR put out their lists. My list would simply be the whole blog. That way everyone is covered. So it's not that I'm against lists. I'm not. I just don't put my own stamp of approval them. Make sense?

That list you found is simply a list of popular posts. That’s why I said “in no particular order.” Also, it’s an outdated list. It’s missing the whole of last year. If I tell someone that such and such is the first post they should read and it turns out that they are in the group that thought that particular angle was just so-so, then they will likely leave disappointed. I generally only recommend specific posts privately if someone is asking a question that I’ve already answered somewhere. And as it turns out, I have already answered most of the questions I get. ;)

Victor: "The blogger comments are definitely painful to follow and a total failure if you try to retrieve old discussions. A forum software would certainly be much better."

It takes a little work, sure, but this format is not that unlike the old USAGOLD format, and I still retrieve old discussions there regularly. On the other hand, on the three main forums I spent a lot of time on a few years ago (big name forums), ALL older discussions have become 100% irretrievable for various reasons. I can easily create an archive file here that contains all of the comments which can be reproduced if necessary. It is an older but sturdy system. Switching to a new comment system would irreversibly alter those archives and some information would be lost in the transition. Back when Blondie switched to Disqus, I polled some of my big supporters and they emphatically said don't change a thing. By switching to another system, some information would be lost in the archives. And anyway, I personally dislike threaded comment systems.

re: Cliffs notesYes it is exactly as you say - there is no one size fits all and I have written different custom intro's for different people of similar background in the last two weeks. The problem is after having read so much content it is a blur as to which bit of knowledge and and post gave me the 'ah ha! moment'...but realistically the answer is probably there is no one post that does triggers the epiphany. It takes time, lots of reading and frankly an autistic like interest in the affairs of the monetary system....which the average person in the street is typically too busy or feckless to do. Mores the Pity!

re: forum formatI did suspect that the persistence of this format was not by chance but a duly considered position.I have to concede your arguments. Forum software does appear more fragile and less durable in my experience too...and I had noted the similiarity between the usagold archive and the blogger comment system. I don't have anything particularly against threaded systems but acknowledge it would make it harder follow the archive of the usagold site if it had been backed by phpBB. Jason Happy would have had his own religous subsection no doubt (maybe not a bad thing!)

re: reading the archive 3-4 times.I have read it twice now but it is such an epic it takes me about 6 months from start to finish. And if Another really was English, he certainly had a cryptic way with words! 'Perhaps that's a reflection of your my special needs more than of the subject or presentation' :)

I am an indian and i was always intrigued as to why there is such a fascination for owning gold in India specially among the women folk.But after reading FOFOA the veil has lifted a bit.I think having an uninterrupted civilisation of more than 5000 yrs, our populace has witnessed repeated currency collapse and only those who had some amount of gold could survive reasonably well during the process of currency collapse and this historical memory has been transformed into culture.

I'm stuck on this thread, but with a change in perspective all things may seem as they always were.

"In no other way can we account for the venerable air that is already gathering around American annals. When the mind reverts to the earliest days of colonial history, the period seems remote and obscure, the thousand changes that thicken along the links of recollections, throwing back the origin of the nation to a day so distant as seemingly to reach the mists of time; and yet four lives of ordinary duration would suffice to transmit, from mouth to mouth, in the form of tradition, all that civilized man has achieved within the limits of the republic.....Thus, what seems venerable by an accumulation of changes is reduced to familiarity when we come seriously to consider it solely in connection with time.”

I posted a link in the comments here to that paper by Vijay Boyapati a long time ago (a year or more?).

If FOFOA doesn't respond I'm happy to discuss it with you.

If I accurately recall my thinking at the time I posted the link I was impressed by the way this AE student dealt with the erroneous money multiplier theory without sacrificing some important elements of AE. (While many practitioners who identify themselves as Austrian economists cling to this theory tenaciously.)

I couldn't support his conclusions about HI but that didn't detract from the quality of the paper IMHO.

With the amount of comments coming through here, I like having them in one order. That would be date and time order. Maybe it's just the way my brain likes to recall things. But keeping them in that order also reminds me of something my teachers used to say back in school. They would say, "if you've got something important enough to say, say it to the whole class." Threaded comments are convenient for the kids arguing in the back corner, but because they are less public, it's my impression that less thought goes into them and the quality seems to suffer. Have you noticed this happening anywhere else?

Blogger has a counter on my comment management page. There are now 28,885 comments on my blog. And those comments are an important part of the archive. They may not be on all blogs, but for some reason there are still a few people (like Gary) who are reading (and rereading) the entire archive *including the comments*.

A lot of those comments contain hyperlinks to other comments. Even some of my posts contain links to comments. In fact, some of the best and most important comments contain links to other comments, like JR's comments. JR's comments are important to me because they free me up from having to keep writing the same things over and over again and again. They relieve me of the Sisyphean burden of endlessly repeating the same debates.

For example, if JR was here right now, he'd probably point out to Ephemeral Reality that Rick Ackerman and Charles Hugh Smith made similar arguments that the banking class would never hyperinflate the dollar. Then he might link to Rick Ackerman's comment under my post where he wrote, "Sheesh! Where to begin? It's difficult to give up a belief system that took root 30 years ago, but I find your arguments irresistible…"

He might also then link to one of CHS's comments under the same post. And he'd probably give you a few appropriate quotes from that post as well as a couple others as to why supply doesn't drive hyperinflation and therefore "the banking class" is actually NOT in control as most people think they are.

The point is that when I looked into installing a new comment system, one of the things I didn't like was that, upon installation, it would go through and automatically convert the older comments with new permanent links. This would invalidate all the existing hyperlinks to comments in the entire archive of 350 posts and 28,000 comments. There were other unintended consequences that I suspected as well. In the end, I decided not to "fix" it until it was actually broken. ;)

"I tell my wife. All Gold in Indian women's neck will come down when Gold revalues up.But it was that way 90 years ago.

The generation of my grandmother (age 93) were only able to buy a small chain/earing then, unlike past 40 years."

Truly, the $IMFS is allowing "the smart money to take physical gold out of the system at a discount" (as Victor said), that is, to take MORE gold than they actually earned through deferred consumption. Can I have an "AMEN" from the congregation?

Victor, there are various aspects to the word “free” in the context of Freegold which make it such an interesting term. I find it a somewhat slippery term and keep on revising exactly what I think it means, but I think this multi-layered meaning probably appeals to FOFOA’s penchant for fractals ;-)

I realise this is nothing new to you, but for the purpose of me seeing if it’s clear in my own head … I think (currently) that essentially it comes down to something being “free” to have a role as a medium of savings. As such, the medium has all the usual requirements of durability, divisibility and portability, which of course silver and gold have while wheat does not. Additionally its function must be free purely to act as a store of value, so that it is free to flow where and when necessary, which excludes silver from the role. Lastly, it must be free from unambiguous ownership (ie multiple claims upon it), which means that it cannot be lent, and for this we watch, and wait!

By the way, I found your summary post one of the most clear and concise I’ve read, thanks!

"(US/UK)...They will suddenly be poor and without industry at the same time."

Absolutely, no doubt about that, once the MMTs find out that their stuff did not turn out to work (IF it turns out).

"On other words, the problem is misallocation of capital on an absolutely huge and unprecendented scale."

Hmmm, can we agree that "capital" in the national economical context is NOT about tokens, but rather REAL stuff REAL human demand physically and benefiting from? And talking about REAL stuff and benefitting, it comes to the question how to judge personally: Is my kidney less worth than an IPad or the paper price or the weight in gold?

Has hoarding gold as tokens instead of paper tokens any advantage for the REAL overall economy for REAL humans on the physical plane. That is the question to pose. And so far, this to prove or show or at least to point out, had not been adressed here on the blog at all. With India we have a perfect subject and microcosm to study on.IMHO: And to improve the REAL economy, I personally believe, that a working infrastructure is the basic think to start on.Go to India (but not some IT service center, the real India) and go to some "evil dumb IMF country", compare and make up your own mind about that issue.But, as I said, just IMHO, maybe in the end after you hoarded enough gold, somebody finds a way to eat it or to build a kidney out of it. Dont get me wrong, I dont judge, I just question, maybe just once in a while I just judge a stupid answer.Greets, AD

on the comment structure, I used to follow turd ferguson blog and when they switched to forums I quit because I couldn't keep up with all the comments. For people like me that like to read all the comments and in timely order, the present structure is optimal, IMO.

thanks alot for that brain food.I arrive to a thesis:The FIAT/IMF system is superior over a Freegold system, because it makes sure that the hamster stays in the treadmill for overall's and his own benefit?

Since I personally dont wanna be that Hamster and I am pretty selfish I stay with the golden tokens, but still realizing that those are still tokens and I am happy and grateful about the hamster :DGreets, AD

The FIAT/IMF system is superior over a Freegold system, because it makes sure that the hamster stays in the treadmill for overall's and his own benefit?

[...] FIAT/IMF system is superior over a barter system [...]

FYP? :)

The Freegold system provides a foot in both worlds. The sustainability of the real-world barter system, and the soothing credit of the $IMFS.

But if the whole world decides to go crazy for gold under Freegold, it basically slides the position of the overall system across more towards the Bartertown side. So let's hope some terminally-enthusiastic investors stick around.

I for one won't be overly attached to my small mound of gold, once it is properly valued. I'm one of gold's fair weather friends.

Since I personally dont wanna be that Hamster and I am pretty selfish I stay with the golden tokens, but still realizing that those are still tokens and I am happy and grateful about the hamster :D

Perhaps the Indian psyche is they believe that once they take physical possession it remains THEIRS - period, even if it has been purchased via credit. After all, whether you pay cash or credit for it you STILL have it & Gov. & all cannot get their mits on it.

Sure it could be 'lost', buried forgotten somewhere or stolen should a creditor come a looking in the event of default on the encumbered loan. Even then a deal could be struck with the creditor where a payback scheme is agreed as a win- win situation, of course paid back with fiat notes thus retaining their 'wealth' in gold. Perhaps a good ploy when money is scarce, inflation is rife and time is short??

Here in the West it is the same true 'gold bugs' hoarding gold, to be sold only in dire circumstance of whom do the same thing to preserve their wealth, be it with credit or not. The east and west think alike (or at least some of the west!)

Once it's in your possession it's YOURS!

It would also be interesting to know whether jewellery 'snatch and grabs' occur in India. If I remember in the lead up to $1900 last year, reports of these 'grabs' were reported in the US in increasing fashion, pun intended.

My first thought on reading this is that farm subsidies in the US work to depress the price of commodity food crops like wheat and maize. So free-corn would be more expensive than current subsidized corn, which would make Mexico much happier. Go free-corn!

FOFOA posted the $-gold chart and the Rupee-gold chart. He did not post the rupee-$ chart, but it probably looks similar to the Rupee-gold chart, i.e. rising for the past 30 years. Indians could have been saving in USD all these years and still seen large rupee currency gains.

This is the situation in Argentina, where the USD is the preferred store of value. If the USDs are in physical bills then all the better. I’ve heard that real estate transactions happen in physical USDs, and sellers bring two people to help with the closing: one to do the paperwork and one to count the cash.

In 2001 the government ‘confiscated’ USDs by converting $-denominated bank accounts into peso-denominated bank accounts, with the peso instantly devalued by about 3-1 to the USD. Since then, Argentines have been restricted in their ability to convert Pesos to USD. Does this story sound familiar?

Thanks JR for your response to my question. I'm getting it that the flow of gold in India is backwards.

Is the flow of gold in china supporting the chinese economy with it's huge trade surplus?

As Costata illustrated, there are ways in which the gold flow positiviely impacts China's ability to maintain a trade surplus. But IMO I think the key point to take away is not what little impact gold has now, but rather:

[1] why it has such a little impact (sterilization) and [2] how profoundly different gold's impact would be a free floating physical price.

The flow of gold has an impact on local economies, even within the current paradigm that mutes its impact via paper price discovery environment. But that is secondary to a the bigger issue of the systemic pressure such flows put on the current paper pricing system itself (the $IMFS).

Paper priced gold does not operate really in the brake and spur role, even through it still exerts some spur and/or brake forces. Where the rubber meets the road for me is not what spur and brake forces are still transmitted despite the muting, but instead the ability of the paper price discovery mechanism to *continue to* deal with these gold flows and "mute" the spur and brake forces.

================================

Gold demand is generally inelastic in currency terms because its primary use is as a wealth reserve. This is in contrast to industrial metals where demand is relatively inelastic in weight terms. In other words, gold flow by volume should be observed to decline as the price rises while gold flow by value might remain steady. Yet India's gold intake has risen from $4.1B in 2002 to $33.8B in 2011. That's an 824% rise in demand in currency terms at the same time as the price of gold in dollars rose only around 600%. And this while running a trade deficit:

This has to be putting tremendous pressure on anyone working to delay Freegold, assuming such an effort even exists. I guess it's a good thing there are only 1.2 billion Indians.

Is the flow of gold in china supporting the chinese economy with it's huge trade surplus?

The paper price discovery mechanism allows the flow of gold into China to not exert the brake force it otherwise would if gold were priced at a floating, physical price. So the paper price mutes the affect of the flow of gold and "allows" China to keep overproducing.

Boyapti doesn't seem to understand Mises point: we are not talking about mere credit inflation or credit deflation, we are talking about the collapse of a credit bubble, which is really the collapse of a bubbled currency.

The end of Credibility Inflation in the dollar, the waning of faith in the $IMFS system of storing wealth in the derivative debt of the dollar (that led to its overvaluation of the dollar).

"The credit expansion boom is built on the sands of banknotes and deposits. It must collapse.

The breakdown appears as soon as the banks become frightened by the accelerated pace of the boom and begin to abstain from further expansion of credit. The boom could continue only as long as the banks were ready to grant freely all those credits which business needed for the execution of its excessive projects, utterly disagreeing with the real state of the supply of factors of production and the valuations of the consumers. These illusory plans, suggested by the falsification of business calculation as brought about by the cheap money policy, can be pushed forward only if new credits can be obtained at gross market rates which are artificially lowered below the height they would reach at an unhampered loan market. It is this margin that gives them the deceptive appearance of profitability. The change in the banks' conduct does not create the crisis. It merely makes visible the havoc spread by the faults which business has committed in the boom period.

Neither could the boom last endlessly if the banks were to cling stubbornly to their expansionist policies. Any attempt to substitute additional fiduciary media for nonexisting capital goods (namely, the quantities p3 and p4) is doomed to failure. If the credit expansion is not stopped in time, the boom turns into the crack-up boom; the flight into real values begins, and the whole monetary system founders."

The monetary system ($IMFS) that seeks to substitute imaginary capital (credit aka debt) for "real capital" and thereby systematically counterfeit the flow of "real capital" has laid "the groundwork for the unchecked growth of global imbalance, perpetual malinvestment and the series of periodic monetary crises we have experienced for the last 90 years" - but things are changing:

The flow of gold is the flow of real capital, even if today it is obscured by an electronic matrix of imaginary capital (infertile media). Today's debt (the bond market) is imaginary capital in that it cannot perform in real terms; with "real terms" defined as economic goods and services (under current economic conditions) plus gold—and this part is important—at today's prices. It is all nominal debt, but the price of goods and services—as well as the price of gold—is what connects it to reality. And at today's prices of each, bonds are imaginary capital.

The outflow of real capital from any zone signals the need to produce more and consume less. The inflow of real capital signals the need to consume more and produce less. The price mechanism transmits this signal to individual actors in the economy. The inflow of real capital will raise prices vis-à-vis real capital, which makes exports more expensive abroad, lowering exports and raising imports. The country with an inflow of real capital will have to start consuming more of its own production or else it will just pile up and rot.

Likewise, the country with an outflow of real capital will have to start producing more than it consumes. Again, this signal is transmitted to individual actors via the price mechanism. With less real capital upon which credit flourishes, credit will contract, general price levels vis-à-vis real capital will drop, the purchasing power of real capital will rise, and real capital will become more expensive in terms of goods and services. Exports will rise because exportable goods will fetch a higher price abroad, imports will slow because local prices have fallen versus the vanishing real capital, and people will have to begin producing more than they consume in order to survive.

The monetary plane, that electronic matrix of imaginary capital, obscures the simplicity of what is actually happening today, and it does so by design.

[...]

The elegance of this natural regulator is that, as long as it is free from systemic counterfeits, it functions regardless of the shenanigans of monetary "experts". That's because the Superorganism's price mechanism is a function of the purchasing power and flow of real capital, not the purchasing power and flow of imaginary capital (paper promises). To wrest control away from this "forceful but unobtrusive master" one must render its purchasing power and flow infertile in the global economic ecosystem.

[...]

Yet things are changing, even today. That's what the rising price of gold since 2002 tells me. This is about much more than just a rising price. It's not just about a gold or even a commodity bull market. As FOA said, "it has everything to do with a changing world financial architecture." Gold's function in the monetary system is changing.

Exactly - India wouldn't be experiencing an inflow of real capital with its trade deficit.

Its only because of the monetary system ($IMFS) that seeks to substitute imaginary capital (credit aka debt) for "real capital" and thereby systematically counterfeit the flow of "real capital" that India can import so much gold and still have a trade deficit. Only because of the paper gold pricing mechanism (a systemic counterfeit of the flow of real capital) can this occur. But it won't last:

The Free in Freegold

Okay, here it is. What you've been waiting for patiently, I presume. This is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard.

The inflow of real capital signals the need to consume more and produce less.

I think the above statement should be amended to read:

The inflow of real capital with a trade surplus in the plane of exchange medium signals the need to consume more and produce less.

For instance, Germany/China will fall in the category of the need to consume more and produce less. But I don't think India falls in that category since India runs a trade deficit even though real capital a.k.a gold inflows are high in India.

Okay, here it is. What you've been waiting for patiently, I presume. This is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard.

I think I get the fact that FRB has always been malpracticed by the banks, therefore separating the medium of exchange from the store of value (as indicated by the Freegold thesis) makes perfect sense.

But: here's a question: Why should the power of FRB be given to the banks in the first place?

What if each individual depositor in a bank made their choice of time-preference?

Please consider this paper by Sandeep Jaitly on the Duration Mismatch and Perpetual Debt problem. He says:

Each one of those individuals is then at the very least, and certainly at the margin, in thesame position as the person who fashioned the loan in the first place: they will have a[marginal increase] in their silver balance which can subjectively split into what is requiredon demand and what is not. It is very important to understand this concept. ‘Multiplier’ isan insufficient and inaccurate description of the process: ‘recursive’ would be moresuitable as would ‘iterative,’ or ‘self-similar.’ It is also worth remembering that one’s own pecuniaryposition is the result of this process as well. By the beneficence of others – with regards to their preferencefor demand versus non-demand – one’s own personal silver balance is greater (or not.)

It is not difficult to see how this perfectly stable and subjective mechanism could beusurped by unscrupulous characters. The most obvious fraud would be for thestorehouse owner to lend demand deposits for any length of time. In this case, cash silverbalances would not match one to one with deposits on demand. Should a person requireaccess to their demand deposit and there is insufficient cash silver because of this, thenwhatever the cash silver was invested in by the storehouse owner will have to beliquidated in a secondary market. Alternatively, the silver required could be taken fromthe storehouse owner’s equity capital. Either way this is nefarious and fraudulent.Although not fraudulent, the lending of silver for non-productive enterprise, or to put itbluntly, lending for dubious activities where there is no guarantee the principle debt canbe amortised will cause problems at some point. What would be the consequence oflending to such characters in the case of a default? It would be the wide scale destruction ofthe relevant time deposits (beyond the equity capital – if any – of the financial system.)

While I agree that FRB where the fraction determined by the banks is a problem and Freegold eradicates this, I don't see why it would be a problem if individuals made their choices of time-preference. That seems like a stable system to me. Of course loaning to non-productive enterprises is still a problem, but banks doing this can't survive too long. They will go bust. What is required is a honest and transparent governance though, to ensure they don't backstop the risks taken by the banks.

concerning the misallocation of capital I mentioned, of course, I mean the real economy.

The misallocation is a consequence of mispricing the value of savings. This is because most of the savings are in debt instruments, and it will neither be possible to service them nor to pay them back in real terms. Nevertheless, these savings trade at a price that suggests this would be the case.

This has plenty of consequences:

1. The value of resources to be produced in the future, is understated. This leads to insufficient investment in agriculture, mining and exploration.

2. The economy is tilted from investing in businesses to consumption. You can see this everywhere in the deficit countries. The aggregate fixed assets (machines, equipment) of the industrial companies are written off and depreciate, but are not replenished with new investments.

3. Demand is diverted from savings to consumption. This means that holiday parks, cafes and restaurants, airlines, tourism operations are presently profitable, but this situation will not be sustainable.

4. Wages in agriculture, resource extraction, and industrial production are too low while wages in the service sector (from the nail studio to the McKinsey consultant) are too high. Not sustainable either.

5. You can go on for hours. As a consequence of (4) the colleges and universities produce too many lawyers and MBAs an not enough engineers and enough trades people.

I think that if we look closely at how the debtors use the fiat money system with and without the assistance of the savers, it will become clear that we will all be better off with a bifurcated monetary system. And it will certainly be clear that the savers have no business taking debtors on as the counterparty to their savings.

But what I'm saying is that the bifurcation of "savers only zone with gold" and "debtors and savers zone with currency" is not required if each individual made the choice of time-preference element of his savings.

Say- I am an extremely risk averse saver. Then I can choose my time-preference in the deposit system to be 0 days. That is, all I want to do is preserve my purchasing power.

Say that my time preference element is 1 year for 74% of my deposits with the bank. Then I can classify 26% of my deposits to be 0 days maturity and the remaining 74% as 1 year maturity for earning interest (in gold of course).

The risk involved here is of course the banks' vetting capacity of whom to lend my 1 year time preference portion of the savings. But if a bank establishes itself to be trustworthy over a period of time, I can do that.

Freegold partition of savers vs. debtors and savers zone is a requirement ONLY if individuals cannot choose the time-preference element of their deposits AND there is not even a single trustworthy bank on the planet.

A "healthy" Bid-to-Cover (say 2+) would imply a rise in price going forward but, because we're at or about Zero Yield, this Ratio has been steadily rising (currently 4.5ish). Primary Dealers account for circa 80% of the total so I'm assuming that's WHY they've been out recently encouraging a negative Yield outcome at the Auctions.

Once the thing goes into negative (Yield) the BtC Ratio "should" drop back ...however this doesn't include what MAY eventuate as the current "enthusaism" for short maturities morphs into a frenetic scramble to "Get-Short(y)" IMHO.

Let's watch ...and eventually we'll all See what the future brings KJ.

The FreeGold hypothesis see GOLD in a Zero-interest environment.The "appreciation" aspects come, not from earning "interest" but via the inflationary activities of the various currencies.If your preferred currency is "inflating" at 5%PA then GOLD valued in "that currencies terms" will be seen to appreciate 5%PA (give or take)IF the currency is DIS-inflating ie: going from 5%PA down to 3%PA ...Gold is STILL going up ...in that currencies terms.If said currency actually DE-flates ...GOLD "price" in that currency will drop. ...however, under those circumstances you'll have BIGGER problems that having your stach lose a bit of "value" in currency terms.

I understand your position very clearly, this point of view is quite well known in these parts, you are advancing the viewpoint of what FOA long ago termed a Hard Money Socialists (HMS). (FOA, like me and Aristotle and others, was a HMS at one point too)

==================================

Check out Reply to bron for some discussion on elimination of FRB leaving us with the same problem - the problem stems from FOFOA's dilemma, not from FRB.

** Gold is the only real money there is--fiat currency is not money--so only Gold should be used as currency.

** Fractional reserve lending destroys a currency's value in trade, and therefore must not be allowed.

==================================

but:

[time for concessions to the real world]

** People will always want to borrow for the things they want to have beyond their current financial means.

================================

Indeed,

*** History reveals time and time again that this seemingly "perfect" Gold-only system naturally evolves into fractional-reserve lending because it is what the people want.

so

"In this commentary I shall attempt to clearly lay out what I feel this "perfect" monetary system to be -- the *perfect* system for a consistently imperfect world, that is. I am not so bold as to think that the world of human ambition and disposition is something that can be altered to suit the perfection of our preferred (Gold coin) currency's characteristics -- especially the limitations (fiscal austerity) it imposes on its users, the population at large. I therefore resolve myself (and hope you do, also) to the humble thought that our currency system as a whole might be artfully developed into a state of harmony with the world in which we do live. The present system, and all failures before it, have been as square pegs in round holes. With the system to be described, I hope to avoid any system that lends itself to the repetition of past abuses and failures.

[...]

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole."

Thanks. I see it more clearly now. Gold is *ONLY* used for savings as a wealth reserve. No appreciation, No depreciation either (in absolute terms). What can be the reference point for the reference point itself? :)

JR,

Thanks for the pointers. Interesting thoughts.

FOFOA's dilemma continues to exist even in a 'perfect-FRB' system where individuals choose their time-preference, because the saver is still exposed to the conflict with the debtor.

I think I see it more clearly. Freegold accepts that there will be unscruplous characters in the society that would want to usurp the savers' wealth and Gold stands in the way of these characters as a protector of wealth.

@fofoaBy threaded comments - I think you mean ZeroHedge style where there are little forks in the conversation and rejoinders like "gold bitchez!"Yes I agree that wouldn't work so well although the usagold format ultimately didn't guarantee protection from trolls and the 'ears that bite'.This is one of the more harmonious and considered forums so best not mess with the magic forumla too much.I absolutely agree that we need comments after a post that are specifically tied to the content of that post. I only realised how important the FOFOA comments are about 6 months after reading up on the back issues much to my chagrin.I recall Euro Gold in July 2011 as an example. The comments really explored all the nuances of the post and were critical for me to get the most from the post body.

In any case, consider the issue closed for me. I can see you have already given this due thought and have good reasons for using the current system.

Also, I can see now what I did to start this conversation was to prescribe a solution rather than describe my problem!My problem is that I tend to browse the comments on my slightly older spec iDevice and loading a full bore FOFOA post + 180 comments is somewhat slow - not to mention time spent trying to find where I was exactly last time I checked in.When comments hit 201, I have to scroll to the bottom and click through to the next set of comments and load another bulky page, scroll back down the body of the post to the start of the contents, rinse, repeat.I've tried an RSS feed but the comments are truncated and only the first few paragraphs of a JR reply are delivered - and they aren't labelled by author.

Does anyone have a nice way to consume and track the comments? email subscription? I will try that but this blogger posting account is on a throw away email address that I don't check too much.

curious to hear FOFOA's comments on the recent Buffett letter on gold, stocks and bonds. thx

hi somanyroadsinvesting. I'm by no means an expert, and still trying to learn this freegold concept (going on two years I think now), but for the benefit of myself (to try and collect my Thoughts/reasoning) and for the benefit of the few of my friends who would read it and hopefully begin following FOFOA, I did a critique of sorts of Warren Buffet's letter that came out last week (using a lot of FOFOA arguments). It's no where near perfect but I thought you may enjoy it is an attempt to argue FOFOA's points to someone who would might be unfamiliar with him. If you do read it, please let me know what you think!

Maybe, DP, but I think a quick, nasty strike on shares could go a long way to correcting that condition. OBA's view was, if memory serves, that this could be creating some "wriggle room" for another run into short term paper. We'll see.

In the meantime, Robert "RPG" Zoellick has stepped down from heading The World Bank.

Chris Fsay you have a million USD in physical. Suppose the physical market breaks down with the paper and suppose that is for a significant period of time. My play would be far out of the money Puts. If that were to happen you'd have cash to use waiting for the physical to gain in price. For about 2 to 4 cents per month you can buy GLD Puts at 100.

And in other news, I found this snippet from Karl Denninger rather amusing (and appalling) as it is indicative of The Fed's fundamental dishonesty.

From the FOMC

"The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate."

KD

"2% constitutes "Stable Prices" eh? That's a 143% inflation rate over a working man's life! If this is "stable prices" then can I ask what unstable might be defined as? May I also ask where Bernanke and the FOMC got the ability to redefine words in the dictionary..."

I use a method that might be helpful. I'm not sure about a PC, but it's easy to do on a Mac: Whenever I come to a stopping point in the comments, I copy and paste the first 2 or 3 words of the last comment I read in an email and then email it to myself. Then when I'm ready to read some more comments, I open up my mail, copy those 2 or 3 words again, then go back to the comments page. On my keyboard, I press Command F (Control F on PC). This opens up a search bar at the top or bottom of the page. Then I paste those 2 or 3 words in that bar. What this function does is searches that particular page for those words. On my computer, it automatically goes to wherever those 2 or 3 words are on that page.

This may sound like a lot to do, but it's actually a very quick way to pick up where you left off. And if you just wanted to search "Winters" in the Search-This-Page bar, you could type "Winters" and it will show you every time that word appears on the page.

You mentioned you had an iDevice. I assume that means an iPhone. The Search-This-Page function works on it too if you're running a current version of the iOS software. There are probably ways to do this on other mobile devices too, but I'm not familiar with them. Here's a link on how to Search Page on an iPhone:

I've never subscribed to comments before. From what I understand it emails every comment to you. That seems like a lot of crap to deal with for someone like me who likes to keep their inbox tidy.

Anyway Winters, I hope this helps.

For the record, I agree with FOFOA. We should keep Blogger the way it is. This website and all its contents are too VALUABLE to lose a single word or hyperlink. If things turn out the way most followers of this blog anticipate, this site has the potential to go down in economic history as something as monumental as 'The Wealth of Nations'.

If we were to lose some of the content here, our progeny may one day consider it a crime against humanity.

FOFOA's blog is a lot like gold: It may be antiquated but it's still the greatest store of value known to man.

I suppose like most folks that hang around this blog, I spend a lot of time thinking about the things that I have read here. I like to listen to talk radio when I drive. And I don't know if I just notice it more now than I used to, but I hear many radio ads for gold investment, coins, bars, IRA's from companies like Goldline or Lear Capital.

The one thing I can't help but thinking when I hear them now is that, what they may actually be doing is appealing to weak handed buyers. Moreover, their pitch is one that would create a weak handed mindset.

These ads say things like "add gold to your portfolio" and "the price of gold has risen steadily over the last ten years"

And I know myself, that I have used the latter argument to friends and family.

I'm sure this fragile line of thinking is not lost on most of you. For when $PoG goes into its REAL mania phase, fueled by increasingly more and more weak handed buyers; and then falls off in a massive blow-off. There will be a tangible amount of people that not only loose big time, they will loose even bigger than those that did nothing at all.

I must say, I probably would have been one of them had I not found this blog.

So for that I say - Thank you very much FOFOA!!

------------------------------

On a side note. I might suggest a new poll for the side bar. Since it seems to come up ALL the time - Under/Over date on the collapse of $IMFS.

You wrote:I absolutely agree that we need comments after a post that are specifically tied to the content of that post. I only realised how important the FOFOA comments are about 6 months after reading up on the back issues much to my chagrin.

Your wish is our command Sir!

I think that this is, potentially, a much more important post than it might appear to be at first glance. It raises some very interesting questions about this $IMFS world we live in and the Freegold-RPG one many that here expect to inhabit in their lifetime.

So I would like to highlight a few potential discussion points that relate to this post and the choice selections from A/FOA, FOFOA, Aristotle and Mises’ writings provided earlier in this thread by our very own JR.

1. Does a current (trade) account deficit drive the capital account or is it the other way around? (ie. the flow of capital drives the trade account)

Where should gold flows be recorded in the international trade “books” used to calculate the balance of payments (BOP) today and after the transition to Freegold-RPG?

(For the economics obsessed – What is the impact of Freegold-RPG on capital theory? And how will Freegold-RPG impact on the international banking system?)

As the regional head of the WGC said in the 60 minutes piece that FOFOA linked in this post “if India sneezes the gold market catches a cold”. As the saying goes “history is not destiny”. So allow me to make a provocative statement or two with a view to kick starting a discussion.

2. India lost the leadership role in the physical gold market in the second half of 2011. China is now in the driver’s seat. In that period we were shown how China, in collaboration with the BBs, is going to use its position to give the unwary first hand experience in costata’s rigged market dictum.

A number of arguments to support the first statement are in this very post by FOFOA. Delving into the issues that arise from looking at the currencies and BOP of India and China will supply most of the rest. IMO applying the inductive reasoning (which our favourite Yeti excels at) will complete the picture.

"Well, Lucy, let me tell you a little story. Way back in 2002 he bought a whole lot of gold because the $ seemed to be going down and it seemed a good idea at the time. Everyone thought he was stupid because gold never does anything and doesn't pay any interest, it just sits there.Amazingly, this turned out to be the best investment he had ever made. Gold kept going up in price much more than other things for years, every year.Then he discovered a website called FOFOA where all the thinking of someone called Another and his friend FOA was explained in great detail. They explained that gold was going to be the reference pointof value for everyone in the future and that it's price would have to be very, very high. There would come a great transition to this new system because the old system was not working.So, your grandfather, whenever he had doubts about the wisdom of his large gold position would always go to FOFOA's blog and re-read all the archives and the comments sections.Whenever he did this he was always re-invigorated and actually bought more, convinced he was on the right track.But where he REALLY made money wasbecause of all the out-of-the-money call options for PHYSICAL GOLD that he had purchased in 2012 from a bank they all called "The Squid".The Squid, of course, tried very hard not to deliver physical gold and simply give $ as settlement, but a judge decided that a bono fide contract between consenting adults had to be enforced so one day a truck arrived full of bars of gold from The Squid. After the great transition that occurred in 2014 and gold became stable at the price of 55,000 $/oz.no-one could really make any reallybig amounts of money because the price is now so stable. Everyone just uses it as a perfect store of value. If they want to speculate a bit they have to go to other things.

So, the reason your grandfather has so much money is that he believed what FOFOA wrote about so eloquently, and conservatively bet on the great transition. It was the transition that made the real money.

That is why we as a family don't work and actually spend a lot of time helping and feeding the poorin our community."

@RJPadavonathanks for the tip. That works on a well powered PC or iPhone 4. My 3GS takes too long to render the web page though. I'll try the email subs and see how that goes. The 3GS can render emails one by one pretty quick. and yes one post = one email in your inbox.

@CostataThis is where I let you mental giants carry the discussion. I can read FOFOA and mostly get it but I couldn't pass a turing test on capital account deficits just yet :)

FOFOA: And then there is the issue that you cannot squeeze blood from a turnip. You cannot force the repayment of something real that someone no longer has.

…or how about…

FOFOA: Courts will only be able to enforce settlement in dollars. You can't force a closed tractor factory to deliver a tractor it never made, but you can force it to pay the equivalent in dollars. You can't force a barren mine to dig up gold it never had in the first place, but you can force it to liquidate assets and pay in cash.

Thanks. I understand. But, the gold exists and they are a BB, so thissituation is not the same as forcing a barren gold mine to deliver non-existent gold. 165,000 MT of thestuff apparently exists. As a judge, I say that they should deliver exactlywhat is written in the contract.Sure, I am willing to negotiate for $.How about 100,000 $/oz. ?

thanks for your clarification. I perfectly agree on those facts, I guess the only one capable of describing it clearer, would be PeterSchiff ;)BUT:

"Nevertheless, these savings trade at a price that suggests this would be the case...This has plenty of consequences:"

I'm not so sure if reason vs. consequences are so tight to each other. Maybe it is the other way around (just think of the roman empire)? What you describe I would just simply call DECADENCE.I think we can agree that this behaviour and the consequenting sudden bust would have been smoothened or prevented in an international RPG curreny environment. Anyway, to late for that.And I like to stick to the question: How does freegold on the internal national microeconomic level prevent the social drift to decadence? I mean, sure no doubt about the RPG on international basis, but I dont see on the national level how the saving habits (in what tokens people save) change anything about stupid decisions.Or the other way around to stick with the topic, in the case of India, improve the overall conditions. Remember: We are talking about the physical plane.Greets, AD

This is where I let you mental giants carry the discussion. I can read FOFOA and mostly get it but I couldn't pass a turing test on capital account deficits just yet :)

You are able. The big lie is that we are unable to understand. We can.

Capital account deficits (and offsets) are merely double entry book keeping writ large. Is bigger truthier if the smaller version is BS?

Let's take a stroll back through time. Why was double entry book keeping invented c1494? What genuine need did it fulfil?

To provide a snaphot, at a point in time, of the financial condition of a business. It's merely a model. An accurate model on a small scale. IMO that's why this evolutionary development was adopted widely.

One of the most interesting things I took away from the 'India's Gold' segment was the poorest Indians buying those 1 gram gold bars. I live in an area where there are many people of small means. When I try to talk to some of them about owning physical gold, most of them say "That shit's $1700/oz. I can't afford that." If they'll listen, I explain to them that they can buy gold one gram at a time. I'll even show some of them where they can order it online.

Although I've never seen one for sale, the Perth Mint are now minting half gram "Mini Roos". This makes gold even more obtainable to the unwashed masses:

Now, I know many followers of this blog are of the mindset that The USA is toast. I used to think this way myself, until I had an epiphany: We have an American version of poor Indian gold owners that will carry us through the Freegold transition.

Ladies and Gentlemen, I present to you the post-RPG Superclass:

http://www.youtube.com/watch?v=zctIVAYvhS4

Watch out world, the USA may be going through a rough patch, but we are not down for the count. The Empire WILL strike back. Just wait and see. It will be a beautiful thing to behold.

2. India lost the leadership role in the physical gold market in the second half of 2011. China is now in the driver’s seat. In that period we were shown how China, in collaboration with the BBs, is going to use its position to give the unwary first hand experience in costata’s rigged market dictum.

A number of arguments to support the first statement are in this very post by FOFOA. Delving into the issues that arise from looking at the currencies and BOP of India and China will supply most of the rest. IMO applying the inductive reasoning (which our favourite Yeti excels at) will complete the picture.

I believe you have posted a link to this piece by Bron before, but I’ll repeat it:

”In Q4 2011, China consumed 190.9 tonnes of gold, compared with India's 173.0 tonnes, ranking China top in terms of consumption, something the WGC had not expected last year.”

MH: So China is now the world’s leading “consumer” of gold. Whether or not we see additional ‘rigged-market-rollercoasters’ in the gold price going forward depends on what is meant by “China”.

If “China” is the Chinese people, each buying a few grams of gold to protect their savings in a similar way to what the Indians are doing, then I don’t see how that would lead to a different market dynamic.

If “China” is the Chinese big money and CB (Big Trader?), then this concentration of buying power could purposefully swing the market to their advantage. How would they “collaborate with the BBs” in this – why would the BBs help?

”Indian households save about 30% of their income compared to Americans who save about 5%.”

”After remaining relatively flat during the early 1990s, the average saving rate of urban households relative to their disposable incomes rose from 18% in 1995 to nearly 29% in 2009.”

MH: So Chinese and Indian savings rates are similar.

”Gold is so important to the lives of Indians that the poor can now get financing for it.”

MH: Weak hands in the making? Or at least pro-cyclical demand forces?

” According to RBI, the current account deficit is a cause of concern because of inelastic gold and oil demand, it said.”

Oil demand would be relatively inelastic in real (BBL) terms, while gold would be inelastic in currency terms. So raising import tariffs on gold would have the same effect as raising the local price of gold, which should slow gold imports while simultaneously increasing tax receipts.

But this artificially-higher local price of gold won’t act in the proper fashion to balance the economy, because it cannot be arbitraged by moving gold across national borders.

JR: -Just a walk in the park ...or more likely a desparate crawl in a Desert sans Oasises(sp?)

ER: -The ultimate "currency-evaluation" of what we anticipate will be FreeGold, will be as a result of a resumption of a NEW Global Fiat Regime "after" a chaotic retreat into the "Here 'n Now".The NGFR will come about as a subservient System ...deferring to GOLD ...and of necessity those involved in Management of the various Fiat Currencies (there MAY only be 1 or 2) will do their level best to implement / maintain prudential operations thereof.

As we all know India imports large quantities of gold. Under the $IMFS regime this gold is classed as non-monetary gold. It is treated as a commodity import like oil, wheat etc. Therefore it adds to India’s trade deficit.

That has me confused a bit. Are you saying that under Freegold, gold will be classed differently (capital/current account wise) than under $IMFS?

Gold flows in the opposite direction of goods and services. Remember when ANOTHER said, "gold and oil can never flow in the same direction"? Well it's the same thing with other goods and services. Germany and Greece may both be exporting and importing, but Germany is exporting more, which shows up on the BOP as a Trade Surplus and a Capital Account Deficit. At a high enough price, a small amount of gold can (and will) flow in the other direction, from Greece into Germany, and if its value exceeds the (net) trade difference between Germany and Greece, it will turn Germany's Trade Surplus into a Trade Deficit and a Capital Account Surplus.

My understanding of this is that Gold will function even though it is recorded in the same category as other goods and services... In fact physical gold is just a "good" like other physical goods, and must be categorized as such to perform the much talked about spur and brake function on the currency flows.

today, there is a huge incentive to gamble with financial products rather than to invest in businesses; to consume rather than save; to bring future gains and substance into the present and to pay them out today. It is not that merely tulip bulbs are mispriced; or just American real estate; or internet stocks. No, the problem is that basically all debt is mispriced. This is huge!

Sure, I cannot cure all of the human weaknesses with a single policy change. Nobody can. But putting the incentives straight would be a big step forward.

ChrisF,

we basically had this discussion some time ago. Your idea will work out only if the BBs will drive the official London price of gold up in order to induce owners of the physical to sell. In some sense, this would be a controlled unwinding of the paper gold market. The Fed can always print enough US$ for the BBs to purchase the required physical, probably seriously damaging the US$ in the process. I think Michael H called this "The Fed triggers freegold" - I agree that this is a possibility - it may even let *them* decide about the timing.

The other scenario (which many here think is much more likely) is a plain old-fashioned run on the BBs in which credit collapses and becomes worthless (=unallocated accounts) and cash (=physical gold) becomes difficult to get hold of. In this case, the 'official' London price might first drop and then, after a few days, they would stop trading and close out all unallocated accounts for cash at the low price. In this case, you would look rather stupid.

If you still want to gamble, I agree that options on GLD are probably the best choice (I think you said this some time before your fairy tale). This is because the BBs need GLD and its options to work because eventually they want to get their hands on the gold. So, yes, it is a good guess that options on GLD are probably among the last financial contracts that will still be alive. Also, don't underestimate the decay of the premiums. If you need to wait 5-10 years, this can cost you a lot of money.

But finally the question is who is your broker? They might go MFGlobal in the meantime. That's the risk you have to live with.

The other thing is you can phone one of the big banks and ask them for an option on physical gold. Apart from the fact that they won't talk to you unless you have a company that is an ISDA member, I am pretty sure you will not get a contract for physical gold. They won't sign any such thing. They know why.

Thank you for your detailed comments.I am working on the out-of-the-money call options idea because the potential price move and thus payoff is so large in a short time-frame. If only one knew when!Also, the actual strike price say between 5000 and 8000 $/oz is not verymaterial to the potential payoff if we are really going to 55,000 $/oz fast.The possibility of making 50 millionfrom a premium of say 20,000 is for sure worth investigating fully IMHO.

If you notice recently $PoG has been doing it's best to Tango in concert with S and P 500 ......and, being a "futures derived paper asset" so it should.$PoG - essentially represents the price of "Paper-Gold" ...with all the attendant "risks" that "investment" entails.

So, when/if push comes to shove (any old day now) where do you really think $PoG might be headed?

"John Embry: I strongly suspect that they have materially less than they try to represent. The IMF permits a one line entry on their balance sheets which aggregates physical gold with gold receivables. That’s ridiculous and it is done to deceive analysts. For example, if the Americans had the 8,161 tonnes that they say they have, they would be delighted to submit to an outside audit and shut their detractors up. However, they stonewall all requests."

As Rocky said to Apollo, "ding, ding."

Now that is logic I can understand.

But who has it then? Probably the same folks stuffed full of USA bonds at a ratio of 30-1 at today's price.

John Embry: "…if the Americans had the 8,161 tonnes that they say they have, they would be delighted to submit to an outside audit and shut their detractors up."

AN: "Now that is logic I can understand."

Here's some different logic. If the easy money camp in fact does have the 8,161 tonnes that they say they have, but they simply ignore requests to see, count or audit it, they render the opposition (hard money) camp a bunch of infernal misanthropes in the public eye.

Reminds me of the love I got from the silverbug camp after Focal Point: Gold and Kicking the Hornets' Nest. There were even accusations that I was a paid JPM shill "using logic as a weapon" against silver. Should I have been delighted to submit to some sort of proof that I was, in fact, NOT a paid JPM shill to shut my detractors up? Or was it more logical for me to simply let them carry on as they were?

The possibility of making 50 millionfrom a premium of say 20,000 is for sure worth investigating fully IMHO.

OK, you have your $50 million, now what? Are you going to rush out and buy some physical so you can prevent the loss of whatever purchasing power that amount of paper possesses? I hope not because you will find there is nobody willing to trade your dead dollars for real physical gold.

Will $50 million buy a sixer of beer when this over? Doesn't seem worth the risk to me.

I was talking to Eric Sprott yesterday...and asked him how he was making out getting all the silver from his last offering in PSLV. He told me that they had already received it...and we both agreed that Ted Butler had been right on his call that JPMorgan et al would make sure that the silver purchased for this offering was delivered in a timely manner...as 'da boyz' didn't want to run the gauntlet of negative public opinion by taking ten weeks to deliver this batch, like they did last time.

Yeah, that's unfortunate that the gold followers are ignorantly viewed that way. I think in reality it's a group of folks who would like to see the economy right itself by using a proper measurement of value.

The USG lies, and lies big about just about everything. They have no choice since they're on the back end of the biggest confidence game the world has ever seen.

I just personally find the probability higher that they sold off the gold to perpetuate the scam because the alternative that the rest of the world is just that dumb doesn't add up.

I wasn't trying to re stir the hornets nest on silver.

I'm sure you've seen some choice comments over the last few years. Think of what these dollar groupies will be saying when they get left entirely in the lurch.

Interesting links in your comment. Thank you. I’d like to focus on India with regard to the observation you made here:

If “China” is the Chinese people, each buying a few grams of gold to protect their savings in a similar way to what the Indians are doing, then I don’t see how that would lead to a different market dynamic.

This is how I see the situation in India. The demand is mainly private, widely disbursed and almost impossible to control. Also as Biju pointed out in this comment if the Indian government attempted to constrain gold imports it would be smuggled in to meet demand. In my opinion the failure of the government of Vietnam to control gold movements also supports Biju’s prediction.

India has negligible gold mine supply and the Indian government appears to be transparent about its gold reserve acquisitions. As you point out demand in India is currency inelastic. India is running a large trade deficit which is exerting downward pressure on their currency (directly or indirectly). The Indian government needs to use its FX reserves for trade related purposes.

I think we can say with confidence that India is in no position to manipulate the gold market. In fact I would go further and say that demand from India is near its “purchasing power ceiling”. If this it true then the rupee exchange rate is the key determinant of volume demand

Now let’s compare this to the situation in China. They are now the number one producer of gold. So with this thought in mind I would like to revisit that article I linked earlier and part of the text I quoted (my emphasis) from an analyst who thinks China’s gold production could be much higher than the published figures.

The China Gold Association (CGA) numbers reflect production by their members only -- but omit gold mined by non-members….. The CGA data also excludes production from mines owned and operated by the military, which is significant according to sources. Not to be overlooked is by-product output from copper, silver, and other metal mining activity…...

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